Pricing, record high costs for feed threaten to sink Maine’s dairy farms

John Stoughton the owner of Misty Meadows Farm in Clinton said that due to the sharp increase in the price of grains, high fuel prices, lower then usual corn yield, his his farm is loosing about $30,000 every month. Stoughton's farm is among the highest milk producers in the state with about 1,100 holsteins.

T.J. Wright, 23, is the second of three generations who work on the Misty Meadows Farm in Clinton. He said the price of milk is relatively high but that money does not make it back to the farmers and the grain and fuel costs have gone up sharply. Wright and his father John Stoughton remain hopeful that the the farm will make it through this economic hardship.

A series of colliding factors, including the weather, grain speculation and antiquated federal policies, have sent Maine’s dairy farmers spinning into one of the most dire situations in recent memory.

While consumers haven’t noticed any change in the price of a gallon of milk at the grocery store, behind the scenes the economics of milk is in disarray.

Maine dairy farmers, and the industry in general, are facing a grim future, the result of a complex federal milk-pricing system that dictates how much a farmer gets for his or her milk; rising fuel costs; historic high prices for cattle feed; bad weather in Maine; a drought in the Midwest; and safety nets ill-designed for the current conditions.

“We’re really barely scraping to get by,” said John Stoughton, owner of Misty Meadows Farm in Clinton. “We have the next generation coming. If it wasn’t for that, I don’t think we’d worry about staying in business.”

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Stoughton milks between 500 and 600 cows, and said he’s had to dig into his savings and retirement to keep his head above water this summer.

David Doak, who has operated his dairy farm in Monroe for 30 years and milks between 40 and 50 cows, is struggling too. “It’s a struggle every month to pay the bills, it really is,” said Doak, 64, “to cover your debt load and have something left over.”

In August, Maine farmers received between $18 and $20 per hundredweight, or 100 pounds, of milk. Meanwhile, the cost of production, which includes feed, fuel and labor, was estimated in 2011 to be $25.03 per hundredweight, meaning farmers are losing money for every gallon of milk they sell.

Consider also that grain prices have increased significantly since 2011. “Grain prices make up one third of the cost on a dairy farm,” said Richard Kersbergen of the University of Maine Cooperative Extension. “You can imagine what this does to the bottom line of these dairy farms.”

Maine currently has 307 dairy farms in the state, ranging in size from those milking 10 cows to the largest farm in the state, the Flood Bros. farm in Clinton, milking about 1,700 cows. There are cow dairy farms in 15 of Maine’s 16 counties, Hancock being the one exception, though it does have sheep and goat dairy farms, according to Julie-Marie Bickford, executive director of the Maine Dairy Industry Association. Dairy farms manage 700,000 acres of Maine farmland and woodland, employ 1,300 people directly and support closer to 4,000 jobs, she added.

In August, Maine’s dairy farms produced nearly 51 million pounds of milk. The industry has an annual economic impact of $570 million, she said.

The current struggles of Maine dairy farms will have an impact on the industry’s future.

“When you go through periods of loss or low profitability, an inability to replace equipment and keep updated, it puts you in a position where you can’t go forward,” said Dale Cole, president of the Maine Dairy Industry Association’s board and a second-generation farmer who milks between 90 and 100 cows in Sidney. “We need young people … to take these places over and it needs to look like a business you can make a living at.”

Economics of milk

Milk is complicated, according to Bickford. More precisely, the economics of milk and how the federal government sets the minimum price farmers receive for their milk is complex.

“The standing joke is there are only three people who truly understand dairy pricing and they’re not allowed to fly on the same airplane,” Bickford said.

The minimum price a Maine dairy farmer like Stoughton or Doak receives when they sell their milk to Oakhurst Dairy, one of the few family-owned processors left in the country, is not determined by how much it cost to produce that milk or how much local demand there is for their product. Instead, the price they’re paid has its origin on the floor of the Chicago Mercantile Exchange, where global commodity traders and speculators buy and sell cheese and butter futures.

It is an “intensely convoluted and frustrating system,” according to Walter Whitcomb, commissioner of the Maine Department of Agriculture, Conservation and Forestry, who is co-owner of a 400-head dairy farm in Waldo.

It’s also a “failed” system, Bickford said. “When you pay farmers based on a pricing system that takes its source from a speculative market like the Chicago Mercantile Exchange, you’re opening it to other factors that could influence the price beyond what it costs to make the milk.”

An example: The cooling system at a giant cheese warehouse in New Mexico breaks down and forces the owner to dump a huge amount of cheese on the market before it spoils. That increase in cheese supply will mean Maine dairy farmers receive a lower price for their milk. Likewise, China could decide to buy large amounts of butter, which increases demand for milk and increases the price Maine dairy farmers receive for their milk.

Bickford calls the system “bizarre” because most Maine milk is sold to Maine residents in liquid form, which carries a higher value than cheese or butter. She says the prices Maine farmers receive should reflect that local dynamic, plus the cost of production, which often is higher in Maine because the state is farthest from the feed source in the Midwest.

“The trouble is when the costs go up, nothing happens until the milk supply starts to tighten up,” Cole said. “And that usually means somebody has to go out of business, and that usually means Maine farms.”

The Maine Milk Commission alters the federal minimum price as much as it can to reflect the Maine farmer’s cost of production. However, its hands are tied because if it increased the price a farmer gets for his milk too much, processors would begin shipping in out-of-state milk.

Safety nets not up to the task

In response to plummeting milk prices because of the weak dollar, the Maine Legislature in 2003 passed the Maine Dairy Stabilization Act, better known as the Tier program, which gathers a handling fee from milk processors that is then paid back out to farmers when tight conditions trigger payments.

“The Tier program helps me stay afloat,” Doak said. “It’s done what it’s meant to, to get you to the break-even point. At times it hasn’t done that, but it’s been a big help.”

While neighboring states, which don’t have their own milk commission or Tier program, have seen their dairy industries lose farms, Maine’s industry has stabilized, Bickford said. “This has been hailed nationally as an incredibly innovative and successful program,” she said.

She also admits the Tier program is “unconventional” and can be controversial, especially since the funds that are paid to farmers come out of the General Fund. Because of the volatility in the market, the amount of those funds sent to farmers on any given month are impossible to predict.

“We’re trying to solve a federal-level complicated mess by creating a somewhat complicated state mess,” she said. “It works, but it’s really messy.”

There is also a safety net on the federal level. The Milk Income Loss Contract program is similar to the Tier program in that it is designed to help farmers make up the difference, but it is less sophisticated, Whitcomb said.

However, on Sept. 1 the MILC program began providing coverage at a reduced rate, one so low that the program won’t be triggered even in the current conditions, according to a letter Sen. Olympia Snowe sent on Sept. 13 to House Speaker John Boehner and Senate Majority Leader Harry Reid.

The MILC program is part of the 2008 Farm Bill, which is set to expire on Sept. 30. While Sen. Snowe tried to rally her colleagues to either extend the old bill or pass the new one, Congress left for its recess without taking action.

Over its 10-year history, the MILC program has probably given between $10 million and $20 million to Maine dairy farmers, according to Whitcomb. “It would be a very different landscape without that in Maine,” he said.

However, these existing safety nets are no match for the historically high prices that Maine dairy farmers are paying for their feed.

“We have a situation now where most of the safety nets are based on having low milk prices, but it’s not that milk prices are historically low, it’s that expenses are historically high,” Bickford said.

John Stoughton at Misty Meadows Farm estimates his feed costs have increased as much as 44 percent in the last three months, from roughly $90,000 a month to closer to $130,000 a month.

“Milk prices aren’t bad, but they can’t absorb that kind of grain price,” he said. “It’s the [feed costs] that are killing us right now.”

At about this time last year, corn was trading on the Chicago board for about $3 a bushel. Now it’s about $7.40 a bushel, which means Maine dairy farmers are paying between $50 and $100 per ton more for feed than they were last year, according to Ellis Additon, general manager of Feed Commodities in Detroit, Maine, which sells 1,200 tons of feed a week to Maine dairy farms, enough to feed about 50 percent of the milk cows in the state.

On his farm in Sidney, Cole buys about 38 tons of feed a month, which means he’s trying to find an extra $3,000 a month without a corresponding increase in the price he gets for the milk.

The reason the price of grain has increased so much can be explained in one word: speculation. Corn, soybeans and alfalfa, the grains used in cattle feed, are traded as commodities, which means they are bought and sold with the future in mind, and right now that future looks bleak.

A severe drought in the Midwest is threatening the crop yields, which sends the markets into panic, Additon said.

“The bright thing on the horizon is the price of milk appears to be coming back,” Additon said. “The bad thing is with this drought out West, the corn hasn’t been harvested yet so we don’t know how bad it will be.”

Two other factors are affecting the price of feed for Maine dairy farmers: More corn is being diverted into ethanol production, and the weak U.S. dollar means more corn is exported.

Struggling farmers still need feed for their cattle and Additon has tried to accommodate them when he can. The dealer’s accounts receivables has increased 18 percent over the past two months, which represents more than a million dollars more than usual that Maine dairy farmers are taking on in debt.

The pain caused by the high price of corn from the Midwest is compounded by the fact that Maine’s farmers have had a terrible growing season of their own, which means they are relying more heavily on Midwest feed.

“In the short run we’ll see some farmers go out of business,” Additon said. “There are those who are in a hole so deep they can’t get out.”